There are a number of volatility periods in the Indian equity market, which is once again measured by Sensex. Domestic factors alone cannot define these fluctuations, but it can also be attributed to various global factors. Everyone who invests in the market today asks the question, “Why is Sensex falling?” While market falls are common in stock exchanges, the urge to understand the reasons why this happens is equally important. We shall study some of the most important causes of the recent downfall of Sensex and will give a detailed analysis of what investors should be alert to.
1. Global Economic Slowdown
The global economic slowdown is one of the reasons for the falling of Sensex. Being an integral part of the globally connected economy, any sign of recession or slowing in the major world economies such as the U.S., China, or the Eurozone is likely to influence Indian markets on an overall level. When major economies slow down, they tend to import less and hence become less buyers of other nations’ products. Countries like India whose economy is grossly dependent on exports feel this very acutely and, therefore, the above has a subsequent effect on Indian economy on an aggregate level in terms of decreasing stock market index decliners of which Sensex is an epitome.
International markets have not been too stable with issues of inflation, tensions in geopolitical and supply chain disruptions as there have been a number of global crises issues that are affecting the markets in general, like the war in Ukraine is still ongoing.
With all these issues with the international markets, whenever there is a decline in the international market, Indian Sensex crumbles mainly due to the falling investor confidence and foreign investment outflows.
2. Rising Interest Rates
Another vital reason why the Sensex is dipping is because of the interest rates. All central banks in the world, including the Reserve Bank of India (RBI), have started increasing the interest rates to curb the inflationary tendency in the economy. All said and done, high interest rates make borrowing expensive for companies. With this increase in the interest rates, the corporate investments and subsequently corporate profits shall slow down.
In India, the RBI interest rate has increased in the last quarter several times, which affects the market directly. Equity markets mostly take the view that increased interest rates is a bad news sign because the increase in interest rates deters the appeal of stocks. Higher interest rates typically force investors to move funds to more secure investments like bonds, which yield more with less volatility in the stock market. This change in preference will contribute to a Sensex dip.
3. Inflationary Pressures
The other very important variable that affects the stock market is inflation, and India has witnessed a heavy amount of inflationary pull. Inflation raises the prices of goods and services, thus affecting consumer expenditure, corporate profits, and the overall growth in the economy. Companies face a squeeze in profit margins when inflation is high-a good part of that reason is the rise in input costs, be it raw material costs, energy, or transportation costs-and so on.
Rising inflation in key sectors, such as food, fuel, and manufacturing, has also been characteristic of India. Concerns arising from reduced consumer demand and slower economic growth lead to a declining Sensex.
When investors begin to lose confidence in investing in such a market with eroding profit margins, they may want to move their funds out or reduce their exposure, further causing the fall of the market.
4. Foreign Institutional Investors’ Outflows
A rather strong reason for Sensex falling is the huge outflow of foreign institutional investors. An indispensable constituent in an India stock exchange setup, FIIs’ decisions to buy or sell influence the stock exchange market enormously.
The withdrawal of FIIs from Indian equities has, in recent months, been large scale, and their withdrawal has, largely, been prompted by high interest rates in developed markets such as the U.S. When interest rates begin rising in the developed economies, FIIs tend to pull their investment money off emerging markets like India and park them in more stable and more remunerative assets in their home market. That creates downward pressure on the Sensex, as demand for Indian stocks ebbs away.
The reduced foreign investment in India’s equity market often affects the psychology of the market, and this also has a domino effect. Domestic investors often follow the lead of FIIs. And if the foreign investors start selling, this results in the creation of negative sentiment among domestic investors, which accelerates the fall in the market even further.
5. Poor Corporate Earnings
Another extremely important reason for the fall in Sensex is a decline in corporate earnings. In recent times, Indian companies-similarly by sectors like manufacturing, IT, and financial services-have come up with weaker than expected earnings. A decline in corporate profits usually results in a plunge in stock prices, which directly affects Sensex.
Other issues that may lead to week earnings reports include inflation that accelerates input costs, lower consumer demand, or interruptions in global supply chains. Hence, when companies fail to deliver on the expected profit margins, the value of their stocks collapses and, consequently, drags down the overall index.
Besides local factors, there are also reasons for Indian multinational companies reporting weaker earnings due to global economic pressure. This therefore further contributes to the generally poor market sentiment as such declined across the board in the Sensex.
6. Geopolitical Tensions
Such geopolitical tensions hugely influence the mood of investors and are fueling global market volatility. In recent times, border tension between Asian nations and trade war have dominated the global markets.
No doubt this geopolitical stress affects India. While fears of supply chain interruptions, sanctions, or economic slowdown due to the conflict result in investor pulling back from stock markets during periods of uncertainty, market volatility does lead to declines in the Sensex as investors resort to risk-averse strategy.
7. Currency Depreciation
Another reason will be that weakening the Indian rupee will lead to the Sensex tumbling. This is because depreciation in currency increases the cost of imports, which hurts Indian companies relying on imported raw materials and goods. With an increase in costs coupled with the squeeze in profit margins, the stock prices tend to rise even lower.
The weakening of the rupee substantially against global major currencies like the U.S. dollar also weakens the appeal of Indian assets for foreign investors. So, FIIs can take back their investments. This shall add up further to the Sensex fall.
8. Government policies and Reforms
Government policy and economic reforms can cause another fluctuation in the Sensex. Negative perceptions or uncertainty created by such decisions, including tax reforms, changes in the trade regulations, or sector-specific rules, can also cause fluctuation in Sensex. A sudden change in the tax rate, a radical change in regulations, or imposition of restrictions on any of the critically important industries create uncertainty for businesses and investors.
Although long-term reforms benefit the economy in general, short-term disruptions are detrimental to investors in terms of the stock prices due to the fact that investors might feel that such policies can damage the profitability of corporate sectors or even the growth of the whole economy. The temporary declines of the Sensex were largely contributed by recent tax reforms or regulation changes concerning the key sectors like finance, manufacturing, and technologies.
While the Sensex might be going down, one should forget not that a market decline is just part of a natural stock-market cycle. Here are a few strategies you could consider during such downturns:
Diversification is Always in Mind: Sector, asset-class and geographical diversification could help decouple risks during a period of market volatility.
Focus on Long-term Goals: Short-term market movements are not a cause to alter the long-term investment strategy. Stay put at your goals and do not get panicked to sell at temporary declines.
Search for Value Opportunities: In the process of market correction, there will be instances wherein stocks become undervalued to long-term investors who can pick up good quality at low prices.
Stay Updated: Closely watch macro-economic factors, global events and corporate earnings announcements to guide your decisions on investments.
Conclusion
Lately, the Sensex has declined, and that has resulted from a host of factors, including global economic factors, rising interest rates, inflationary pressures, and some domestic factors in terms of weak corporate earnings and FII outflows. In such a scenario, these factors are useful for short-term profit but maintaining a long-term perspective while investing in the stock market is a necessity. Proper knowledge with a disciplined investment process can make investors ride over corrections and position them for better growth in the future.
